Genting Malaysia Bhd (GenM) is acquiring Genting Singapore PLC’s casino operations in the UK (Genting UK) for £340 million (RM1.67 billion) cash.
Genting UK’s operations consist of four companies — Nedby Ltd, Palomino Star Ltd, Palomino World Ltd and Genting International Enterprises (Singapore) Pte Ltd. In a statement to Bursa Malaysia yesterday, GenM said the acquisition was in line with its strategy to grow its core businesses of leisure, hospitality and entertainment internationally, beyond Malaysia.
Genting UK’s operations have the largest number of casino properties in the UK with 44 casino properties, including five located in London. They come with established gaming brands such as Crockfords, Colony Club, Maxims, Circus, The Palm Beach and Mint.
As at Dec 31, 2009, the four companies had a total revenue of £194.1 million and a net profit of £6.7 million. This means, at the acquisition price of £340 million, the transaction is priced at a historical price-to-earnings ratio (PER) of 51 times. The four companies had collective net assets of £288.9 million as at March 31, 2010, implying an acquisition price-to-book ratio of 1.2 times.
GenM said the proposed acquisition represented a good opportunity for the group to grow its earnings and revenue base.
Even so, it is learnt that the proposed acquisition has not gone down well with the gaming analysts who were briefed on the related party transaction (RPT) yesterday evening.
“There is no earnings accretion from this deal as far as we can see. Working out the numbers, the profit that would flow into GenM from the companies that are being acquired would be about £6 million to £7 million. That would come up to over RM30 million.
“Compare that to the interest income foregone of RM32 million (RM1.6 billion times 2%), that would mean there is no earnings flowing in at all from this deal,” said a local gaming analyst who did not want to be named.
“There is the argument that the acquisition would give GenM an opportunity to go into the European market, but is that an attractive gaming market today? Revenues for gaming companies there are down while taxes are going up for them,” the analyst added.
Indeed gaming companies in Britain have had a bumpy journey. Australia’s Tatts Group was the most recent gaming company to reveal its problems in Britain. Tatts last Tuesday announced it was writing down the book value of its investment in British gaming machine business Talarius by over A$130 million (RM352.1 million).
It attributed the writedown to an emergency budget from the new British government that will increase the rate of value-added tax, which is expected to affect consumer spending. On top of a tough operating environment in the UK, gaming analysts are also not too pleased that the acquisition would see GenM’s net cash position turn into a debt position, albeit at a small gearing.
“GenM does have the financial capacity to expand the business. But then again, Genting Singapore’s net gearing is 24% which is still manageable,” said another gaming analyst with a local research house. But he added that the price of RM1.67 billion was “quite a good price from a book value perspective”.
“However, from an EV/Ebitda point of view, the acquisition price works out to 11 times FY11 earnings, which is not exactly that cheap. In Macau, where the gaming market is promising, the EV/Ebitda is about 10 times to 15 times,” said the analyst.
As at Dec 31, 2009, the GenM group had no borrowings. However, in its announcement yesterday, GenM said the group would have a gearing of 0.05 times upon completion of the acquisition as a result of the consolidation of the borrowings of the four companies.
The four companies had borrowings of about £99.2 million as at March 31, 2010. GenM said the valuation of the equity value of the four companies as conducted by JPMorgan Securities (Malaysia) Sdn Bhd was between £310 million and £370 million. It added that in arriving at that valuation, JPMorgan had used a variety of intrinsic and public-market based methodologies, which included conducting a discounted cashflow valuation and an analysis on trading comparables. The original cost of investment of Genting Singapore into the four companies with gaming business in the UK stood at £699.4 million
Aside from the UK, the proposed acquisition would also give GenM access to the gaming market in Egypt. In its announcement yesterday, GenM noted that a subsidiary of Nedby has been selected as the new operator of the casino to be opened at The Nile Ritz Carlton Hotel in Cairo, Egypt.
“This hotel, located on the banks of the Nile and in the heart of the Egyptian capital, is undergoing extensive renovation and refurbishment and is expected to re-open in early 2012. The casino concession for the hotel is for an initial period of 10 years from the commencement of the hotel and casino operations,” it noted.
Just two days ago, GenM announced that its subsidiary Genting New York LLC had submitted a bid to develop and operate a video lottery facility at the Aqueduct Racetrack in New York. The group had submitted a US$1 million entry fee to the New York State Division of Lottery on June 1, 2010.
“Payment of the entry fee was made to allow Genting NY to participate in the bidding process to develop and operate a Video Lottery Facility at the Aqueduct Racetrack in the city of New York, United States of America,” GenM said on June 30. The winning bidder is expected to be announced by the New York State Division of Lottery on Aug 3, 2010.
The stocks of GenM and Genting Singapore ended yesterday up one sen to RM2.74 and S$1.18 (RM2.73) respectively.
This article appeared in The Edge Financial Daily, July 2, 2010.
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